Despite supply bottlenecks like inadequate infrastructure, a shortage of skilled labour, an inefficient farm sector and mounting inflation, India’s growth story in the medium- to long-term is brooks little doubt.
The upturn in the investment cycle was reflected in the strong order books of companies, Deepak Parekh, HDFC chairman, told a Citigroup investors conference last week. “The growing confidence of Indian entrepreneurs has been a final ingredient in India’s growth recipe,” he added.
The country was undergoing a remarkable growth spurt, said Rob Subbaraman, an analyst with Lehman Brothers. “In the next year or two, a short-lived economic slowdown caused by overheating or an external shock cannot be ruled out. But far more important, in our view, is the scope for India’s economy to sustain 9-10 per cent growth in the medium term.”
The long-term growth story remained strong, said Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank. However, he cautioned that the slowdown in the US and a tightening of global liquidity might cause some pain in the short term.
After the several monetary measures taken by the Reserve Bank of India, growth in money supply is expected to slow down in 2007-08, which in turn will partially impact GDP growth. As asset prices inflate, driven mainly by sharp increases in real estate prices, the central bank’s monetary tightening stance could become protracted, says Nomura Securities in a report.
Experts feel current inflation is the combination of low agriculture output, investment-driven demand and rising international prices.
Investment as a ratio to GDP rose from 31.5 per cent in 2004-05 to 33.8 per cent in 2005-06, and is estimated by the RBI to grow further to 36-37 per cent in 2007-08. This is fuelling humungous demand for raw and industrial materials. India’s imports of non-ferrous metals, cement, and steel rose in October 2006, year on year, by 74 per cent, 33 per cent and 156 per cent, respectively.
The growth story was expected to remain unabated despite mounting inflation, said Bharat Banka, head (finance), AV Birla Group. “Besides the government, which is making significant investments in infrastructure, India Inc after many years has gone into an aggressive investment mode,” he added.
To avoid a supply glut, the government must maintain this level of investment in the medium- to long-term as the new capacities being put up by corporates come into production, experts feel.